How the low-cost iPhone will make money for Apple

Why iPhone marketshare matters more than profits and how Apple can make money in other ways

Apple’s had a good few years since it launched the iPhone in 2007. To be honest, its lucky streak started with the iPod back in 2001. Those were the days when Apple was making the product that everyone wanted to buy and nobody else could match them. Apple owned the market. The iPod was ubiquitous; like the Walkman in the generation before. Very few people owned an MP3 player that wasn’t an iPad, and chances are, if they did own something that wasn’t an iPod they called it an iPod. Apple was starting its ascent to greatness. People who had never heard of the company suddenly wanted a part of it. The white ear buds defined a generation. Apple was everywhere. And crucially, Apple didn’t just make the MP3 player, it also sold the music, and later the films and TV programmes that people watched on it.

When the iPhone launched in 2007 Apple had already laid the foundations for success. The iTunes Store eventually evolved into the App Store and Apple began raking in the cash - 30 per cent from every app sold by the many developers who joined the Apple ecosystem.

Apple wasn’t the first to launch an MP3 player and it wasn’t the first to launch a smartphone, but it was the first to make a product that worked simply and logically. Apple’s experience as a company that makes both the software and the hardware helped it devise the perfect recipe. The same could be said to apply with the iPad: the iPad wasn’t the first tablet on the market, but it offered software and hardware that was designed to work together, and the infrastructure of the App Store. Apple was on to a winner. But for how long would the good luck hold out?

Some suggest that Apple’s luck is already waning. Its profits have just fallen for a second consecutive quarter. One reason for the declining profits is the fact that consumers are opting for the iPad mini over the regular iPad and the older iPhone 4S rather than the iPhone 5. Apple makes smaller profit margins on these cheaper devices. This trend towards lower cost is said to be because the market for the smartphone has reached saturation at the affluent end. There is talk of Apple needing to make a smartphone for the less well off, and specifically the emerging markets such as China and India where there is a huge untapped group of consumers who can’t wait to get their hands on the latest Apple device.

This market is currently opting for the more affordable iPhone 4 and 4S over the iPhone 5, but not everyone is happy to settle for last year’s model. Some people want the latest device, but they don’t want to pay a premium for it. This is why the various Android phones (particularly Samsung’s) have become so popular. People want the latest model, if they can’t afford the latest iPhone they will look elsewhere for something new and affordable.

Should Apple sell iPhones for less at the expense of its profits? Until now Apple’s solution was to sell older models. While it makes less profit from these models at least it doesn’t have to factor in R&D and new manufacturing equipment, the work has already been done. All Apple has to do is press play. If Apple launches a new low-cost iPhone that device will have already have eaten into the company’s profits.

However, there is another way Apple can make money from the iPhone. It is easy to think about the money Apple makes from the sale of an iPhone, but what of all the software and services that the company sells to the iPhone owner. Apple has hinted at the transition to software and services in its earnings statements this year, breaking out those revenues for the first time. In the second quarter, for example, the category Apple labels as "iTunes/Software/Services" made $4 billion in revenue. If Apple can continue to grow the marketshare of the iPhone then it can continue to grow revenue from sales from iTunes and the App Store, and from everyone that makes a device for the iPhone (the company takes a cut from anything that has the Made for iPhone logo on the packaging).

Apple’s been lucky so far because it’s had the marketshare and as a result developers made apps for Apple’s App Store rather than the other app stores. This has done Apple a lot of favours. There is some concern that if Apple’s market share were to decline these developers would go elsewhere.

However, there is another reason why developers prefer to develop for iOS and the iPhone, it goes back to Apple’s recipe for success that we mentioned earlier. The company makes the software and the hardware and as a result everything just works. The problem with Android, for example, is there are multiple operating systems and multiple devices. The resources necessary to develop for that platform make it a no-go for some developers.

Despite this, history tells us that when a market matures it becomes all about volume - even the best system can lose out to the alternatives, as Apple discovered in the personal computer market. This is why Apple can't ignore marketshare and why it looks like it will be producing a low-cost iPhone.